The Merrill Lynch Affluent Insights Quarterly Survey revealed that 52% of those surveyed who were between the ages of 18 and 34 have low tolerances for risk when investing. They prefer to invest their funds in safer, more conservative investment options. Even though younger generations may be saving money, they are not be as aggressive as they need to be in order to prepare for retirement. By staying away from the stock market, younger generations are not receiving the maximum return on their long-term investments. If you know someone who is fearful of the stock market, here are five strong arguments in favor of investing in the stock market.
Risk vs. Inflation
If your twenty-something is concerned about the risk of investing in the stock market, you need to explain to them about the risk of the market verses the risk of inflation. Yes, the stock market goes up and down; however, stocks have consistently outperformed other investment options in the long term. The longer you have to invest in the stock market the lower your risk becomes because you are able to weather the losses to gain more in the long term. Even though stocks sometimes take a beating, history has proven that stocks recover and provide better returns than bonds or cash investments.
More terrifying than the risk of investing in the stock market is the rate of inflation. Your young adult needs to understand that inflation will take a huge bite of their nest egg if inflation rises faster, or even at a steady pace, than the return on their investment. For example, an investment today of $50,000 with a 2% annual return will grow to $134,579.28 in 50 years. However, throw in a 1.5% inflation rate (which is probably lower than it will actually be) and that money is only worth $64,161.28 in today's value. Sit down and discuss the risk of inflation verses the risk of investing in the stock market and let them play with the Forbes inflation calculator for themselves to see how the dollar will go down in value.
Saving is critical and a high priority
After graduation, many young people feel as if they have more than enough time to prepare for retirement - retirement is decades away for them. They are earning money and want to enjoy it while they are young enough to do so. However, as those of us who are now reaching what our teenagers call "mid-life" can tell them is that good intentions equal nothing unless you act upon them. Encourage your young adult to participate in a retirement plan at work if it is available and to contribute the maximum amount that the employer will match. This is one of the easiest ways to invest in retirement because the money is deducted before taxes and your employer gives you money (the employer's match). Why is this important in encouraging them to invest in the stock market? The more money you can put into savings that provide a good return the less you need to rely on the stock market. This gives people more confidence to tread the stock market waters and begin to build a larger retirement fund.
Start with a robin's egg and build up to a dinosaur egg for your nest
Remind them too that they can open a stock account with a small investment and begin to grow the account slowly. It may take time for the twenty-somethings to put their faith in the stock market after listening to their parents and the news over the past decade or so. It is better to establish their regular savings and then ease into investing in the stock market. As they become more comfortable and they have the funds available to invest, they can increase the proportion of their savings dedicated to investing in stocks. A good way to invest in the stock market, especially for beginners, is by dollar-cost averaging. Dollar-cost averaging is the regular purchase of stocks at set amounts to reduce the market risk of investing in the stock market. Because you invest the same amount of money each week or month, when the stock market falls, you buy more stocks for less per stock but when the market rises, you buy fewer stocks at higher prices.
Stock Market safety
Advise your twenty-something that investing in the stock market is like riding a bike or skiing - - if you take the proper precautions decrease your risk and play safer. Do your homework, consult a financial planner and think before you buy stock. Diversifying your stock portfolio will help you weather fluctuations because as one type of stock falls others rise and offset the losses. If the constant up and down shifts scare you, invest in blue chips rather than newer companies that are just beginning. Investing in companies that are located in industrialized, developed countries is less risky than purchasing stock in emerging markets.
Do not smother your investment
Remind your precious young adult that you did not always want to know what they were doing because sometimes ignorance is bliss. The same is true with a stock portfolio. Investors who constantly consume every bit of information that flows across the internet, through their Inbox and Twitter accounts will likely be more panicky and sell off stock rather than weather a downturn. Checking your stock portfolio and investments every quarter is sufficient to monitor your progress. By checking each day or every week, you will only drive yourself crazy with worry about what will even itself out over time.
More from this contributor:
Are Annuities a Good Investment for Retirement?
Year-end Financial Planning Essentials for Saving Money, Preparing for Taxes and Retirement
Financial Pitfalls I Learned to Avoid During 2010
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